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Choosing a Business Structure for Your New Startup

You’ve just started your small business and are a bit confused as to which structure you should choose. It can be very confusing for a small business owner to know which business structure will be best for them, especially for those that never took business courses. However, it’s important to know that the structure you choose can greatly affect your taxes. That’s why it’s important to make the best choice. Here is a bit of advice for choosing a business structure for your new startup.

Types of Business Structures

The first type of business structure also happens to be the most popular. The sole proprietorship is a business structure ran by one person, the owner. Many small business owners prefer this method because it is easy to setup and doesn’t require any special licenses, other than the license to run your business if your jurisdiction requires it. The second business structure is the partnership. There are two forms of partnership and the most popular is the general partnership in which the partners share the liability and profits of the business. A limited partnership requires one partner to take responsibility of the debt. The last structure is the corporation, which can be one of three types (C, S or LLC). This business structure is for major corporations and the exact requirements and definitions will vary from state to state.

Advantages and Disadvantages of Each

For the sake of this article, we will focus on the sole proprietorship and partnership structures. A sole proprietorship offers many advantages. First of all, it’s easy to set up. Other advantages include being able to file your taxes on a Schedule C rather than having a drawn out form. It’s also the most popular methods among small businesses, especially those ran from the home. However, there are a few disadvantages. First of all, everything falls on the owner. This means that any debt the business acquires will be a personal debt. Last, but not least, it can be much harder to get financing.

The partnership also has many advantages. First of all, the business may be easier to run due to the fact that each owner may excel in different areas. There will also be someone to run the business should one of the partners become ill. Last, but not least, a partnership is easier to run because the liability of the business may be shared among owners. However, a partnership also has disadvantages. The first disadvantage is that a partnership is harder to set up. Another disadvantage is that the partnership may come to an end due to the partners becoming unhappy with each other. Last, but not least, one partner may end up being liable for all the debt.

Which Should You Choose?

The only people that can honestly help you make this decision is your attorney and accountant. There are a number of legal and financial issues that go with each business structure. This means that using the wrong business structure could end very badly.

As a new startup, you have the chance to pick your business structure, but you must do it carefully. Choosing the wrong business structure can lead to bad financial and legal consequences.